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Digital transformation at scale faces its biggest test yet

It takes a village, but a distant one

For years, IT services vendors — and now increasingly consultancies — have been building business models around supporting enterprises’ IT and business processes, largely by leveraging the human arbitrage model and price-competitive offshore centers. While in recent years many vendors have begun to build on-site and/or nearshore facilities offering higher-value services, COVID-19 is now challenging these vendors to shift to remote support. For vendors that largely rely on using offshore hubs in locations such as India and the Philippines, the struggles will be even greater as these countries typically lack well-established infrastructure, iNet connectivity and electricity. But even vendors that rely on a high-touch consulting model and house the majority of their workforce in more developed countries with reliable infrastructure could be pressured in the short term due to an absence of personalization and face-to-face interaction. In addition to these hurdles, all vendors face the challenge of skill shortages, particularly in emerging areas such as AI, blockchain and data science, further hindering vendors’ ability to deliver on their DT programs’ promises.

According to TBR’s December 2019 Digital Transformation Insights Report: Voice of the Customer, improving HR operations, employee efficiency and effectiveness ranked in the middle (No. 5 out of 10) as a DT objective among surveyed enterprise buyers, not only currently but also within the next two years. We believe, however, that COVID-19 will likely force buyers to reorder their DT objective priorities and place HR transformation at the forefront. Vendors that are able to weather the storm by successfully navigating their own internal HR transformation, addressing remote working challenges and executing on business continuity plans with minimal disruption will likely emerge as the winners when the COVID-19 crisis abates.

The two largest opportunities within HR transformation will be centered on: 1) change management, which is typically a consulting discussion, especially for buyers that have yet to embrace the remote working culture; and 2) digital workplace solutions, as the need for implementation and management of platforms like Zoom (Nasdaq: ZM) and Microsoft Teams (Nasdaq: MSFT) at the enterprise level is already positively impacting vendors’ top line.

While digital transformation (DT) began to permeate both the lexicon and the minds of enterprise buyers and third-party providers about five years ago, the current global pandemic has brought a dose of sobering reality, raising questions around not simply when to embrace DT programs but also which processes are most critical to weather the storm. We see employee management, aka HR operations, and cybersecurity as two areas enterprise buyers will race to invest in as the COVID-19 outbreak disrupts operational cadences and highlights security risks associated with remote working. Supplying those services will not be enough; IT services vendors and consultancies must bring their clients reliable scale, making partnering even more critical for digital transformation. 

India-centric professional services rivals compete to prove themselves as front-runner in European market

Vendors look to Europe for new revenue pipelines, but some are falling short

India-centric IT services vendors are looking to do more in Europe, utilizing a few different strategies to get there, including pursuing acquisitions, developing new offerings and building on-the-ground workforces. This allows them to diversify revenue streams geographically. TBR feels this push into Europe is a crucial move for India-centric vendors, to not only remain competitive with each other and advance their bottom lines but also to reap the benefits that the European market has to offer, such as new investment opportunities and a larger talent pool for recruiting.

Vendors look to Europe for new revenue pipelines, but some are falling short

The five leading India-centric professional services vendors — Cognizant (Nasdaq: CTSH), HCL Technologies (HCLT), Infosys (NYSE: INFY), Tata Consultancy Services (TCS) and Wipro (NYSE: WIT) — explored new pipelines for expanding their presence into the mature and growing European market. Infosys worked to close the gap on HCLT in 1Q19, while TCS, Wipro IT Services (Wipro ITS) and Cognizant are feeling the pressure to conform to stay competitive.

Don’t stop thinking about tomorrow: Amazon, RPA, AI and ethical IT in the federal sector

Notwithstanding the increased integration of artificial intelligence (AI) and process bots into government operations, the U.S. federal services sector decidedly remains a people business. At a recent Washington Technology Power Breakfast forum, industry leaders talked talent strategies and how they hope to succeed as digital transformation fundamentally changes the types of people sought for government work. A few key themes emerged as near-universal top-of-mind concerns for forum participants and audience members, such as the importance of developing a brand and messaging values that resonate with the emerging workforce; the criticality of public-private partnerships to develop talent in the greater Washington, D.C., area and beyond; and the concern and uncertainty about the human capital impact of Amazon’s (Nasdaq: AMZN) recent decision to become a much closer neighbor of Uncle Sam.

The trends and issues discussed often repeated themes TBR touches on regularly in its analysis of the IT industry, both within the federal market and across public and private sectors globally. While the perspectives shared were both validating and enlightening, there was just as much value in paying attention to what the panelists did not talk about at length. Today’s pressing HR demands leave little time for talent strategists to worry about the looming disruptive impacts of AI and robotic process automation (RPA), the fundamental changes in labor amid the rise of asset-based services, forward-thinking venture-capital-like approaches to partnerships, or the uncomfortable and growing issue of ethics conflicting with the eagerness to apply innovative IT to government missions. HR leaders and strategic decision makers at the leading services firms will need to grapple with these difficult topics today if they want to stay ahead of disruption that is just around the corner in the dynamic and rapidly changing IT industry.

 

 

Washington Technology Power Breakfast: TBR Public Sector Analyst Joey Cresta was recently invited to participate in a panel discussion on talent strategies of government contractors at a breakfast forum hosted by Washington Technology. The event provided an outlet for executives, HR experts and industry thought leaders to share how they intend to win talent in a competitive labor market while maintaining profitability and bracing for the impact of Amazon’s impending move into Crystal City.

SaaS sweetens the cloud pot but requires vendors to up their ante to participate

‘Best of breed’ spawns diversity in the SaaS provider landscape

The vendor landscape may be consolidating on the IaaS side of the cloud market, but that is not the case for SaaS. Customers are most likely to increase the number of SaaS vendors utilized over the next two years, supported by a number of market trends, including new workload and feature adoption, platform ecosystems, and integrated multicloud deployments.

For workload adoption, there is a leveling of the playing field for which services customers are considering cloud as a deployment method. ERP, for example, used to lag in public cloud adoption but is now much closer to par with often adopted services like CRM and HR. Much of this increased consideration comes from enhanced comfort on behalf of customers for delivering sensitive workloads from cloud providers versus their on-premises data centers.

The other factor is the proliferation of complementary services available via PaaS ecosystems. The most tenured and largest example of this comes from the Salesforce Platform, which supports thousands of ISVs developing and selling solutions that complement and extend core CRM. Salesforce may have been the first, but other SaaS vendors, including SAP, Workday, Microsoft and ServiceNow, are taking the same approach, exponentially growing available SaaS services. The last driver is the continued rise of best-of-breed customer purchasing. For contracting and performance reasons, customers have long yearned for multivendor application environments, and now vendors are actually moving to accommodate that desire. Salesforce’s acquisition of MuleSoft and SAP’s introduction of the Intelligent Enterprise vision are the latest examples of how vendors are supporting customers in choosing and integrating solutions from numerous providers.

 

This special report is part of a series driven by TBR’s Cloud Customer Research reports, for which TBR conducted more than 50 interviews and 200 surveys. These special reports will highlight key trends and topics impacting the cloud industry.

SaaS sweetens the cloud pot but requires vendors to up their ante to participate

Despite the simple graph in Figure 1 depicting SaaS market size, the space remains difficult to sum up. In the eyes of customers, SaaS options are proliferating and spanning a wide swath of business functions and stakeholders. Yes, SaaS is the largest segment of the “as a Service” cloud market—and yes, it will continue to expand. Beyond that, however, SaaS will remain a collection of separate markets, with most vendors specializing in one or two core and adjacent areas, instead of one unified opportunity. Some examples of this fragmented and overlapping landscape include Microsoft leveraging collaboration dominance to reinvigorate its CRM strategy with cloud delivers, SAP returning its focus to SaaS CRM after ceding the market to Salesforce, and Workday investing to build out a financials-focused SaaS business from its HR roots.

The market behaves in contrast to the IaaS market, which is highly consolidated around a standard set of often interconnected services and a small collection of vendors. In the SaaS market, growth will be achieved by new vendors addressing new workloads and features. From a vendor standpoint, there will be greater presence from legacy application providers such as SAP, Oracle and Microsoft, but also plenty of room for more niche providers as functional and regional niches develop.

While SaaS will grow the overall cloud opportunity, the challenge for vendors is that the SaaS opportunity will be more difficult to capture. That is not to say the historical model for SaaS adoption will cease to exist; there will still be SaaS purchases that are driven by lines of business (LOBs), transacted with a credit card in some cases, and deployed separately from legacy systems. At least some of the growth will continue to occur in that shadow IT model. However, much of the growth will be from SaaS solutions that deliver more critical services, are procured by joint IT and LOB teams, and are tightly integrated with legacy systems. These scenarios will require vendors both large and small to up their ante, bringing more sales, integration and support services to the table to win these more complex deals.

Figure 1

Graph depicting SaaS market size by delivery method from 2017 to 2022

‘Best of breed’ spawns diversity in the SaaS provider landscape

The vendor landscape may be consolidating on the IaaS side of the cloud market, but that is not the case for SaaS. As seen in Figure 2, customers are most likely to increase the number of SaaS vendors utilized over the next two years, supported by a number of market trends, including new workload and feature adoption, platform ecosystems, and integrated multicloud deployments.

For workload adoption, there is a leveling of the playing field for which services customers are considering cloud as a deployment method. ERP, for example, used to lag in public cloud adoption but is now much closer to par with often adopted services like CRM and HR. Much of this increased consideration comes from enhanced comfort on behalf of customers for delivering sensitive workloads from cloud providers versus their on-premises data centers.

The other factor is the proliferation of complementary services available via PaaS ecosystems. The most tenured and largest example of this comes from the Salesforce Platform, which supports thousands of ISVs developing and selling solutions that complement and extend core CRM. Salesforce may have been the first, but other SaaS vendors, including SAP, Workday, Microsoft and ServiceNow, are taking the same approach, exponentially growing available SaaS services. The last driver is the continued rise of best-of-breed customer purchasing. For contracting and performance reasons, customers have long yearned for multivendor application environments, and now vendors are actually moving to accommodate that desire. Salesforce’s acquisition of MuleSoft and SAP’s introduction of the Intelligent Enterprise vision are the latest examples of how vendors are supporting customers in choosing and integrating solutions from numerous providers.

Figure 2

Graph depicting the change in the number of cloud vendors utilized in the next two years

Expectation inflation raises the bar for SaaS providers

There may be a growing pool of revenue and room for more providers, but meeting customer expectations for SaaS solutions is anything but easy. Expectations have been on the rise, stoked by the greater control buyers have with cloud solutions versus on-premises software. The days of long-term software contract risk falling entirely on the customer are quickly coming to an end. Not only has the power dynamic shifted, but, as shown in the graph below, customers are successfully using more of their IT dollars to fund innovation over maintenance of existing systems. As a result, different evaluation criteria are being used for IT investments. Up front, there is a much more collaborative process between IT and LOB teams as they decide which offerings meet their underlying business need, not just what fits into their existing footprint. Calculating the benefits and return from SaaS investments is also a challenging task, as deployments use business outcomes as the ultimate goal. Although hard calculations seem challenging for most customers, it’s clear that enhanced levels of support and “customer success” roles are increasingly valued. Having these post-sale resources available and putting a greater focus on outcomes and other intangible benefits than on technology benefits seems to be the best way for SaaS vendors to meet inflated customer expectations for what the solutions can and should do for their business.

Figure 3

Graph depicting IT investment strategy of SaaS adopters three years ago versus now versus three years from now